American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Contagious Adverse Selection
American Economic Journal: Macroeconomics
vol. 4,
no. 1, January 2012
(pp. 1–21)
Abstract
We illustrate the corrosive effect of even small amounts of adverse selection in an asset market and show how it can lead to the total breakdown of trade. The problem is the failure of "market confidence," defined as approximate common knowledge of an upper bound on expected losses. Small probability events can unravel market confidence. We discuss the role of contagious adverse selection and the problem of "toxic assets" in the recent financial crisis. (JEL D82, G01, G12, G14)Citation
Morris, Stephen, and Hyun Song Shin. 2012. "Contagious Adverse Selection." American Economic Journal: Macroeconomics, 4 (1): 1–21. DOI: 10.1257/mac.4.1.1JEL Classification
- D82 Asymmetric and Private Information
- G01 Financial Crises
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies
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